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Replies to Queries 2
Desperately seeking 10 per cent
We act as tax advisers to three associated companies A, B and C. Company A is the only one that is currently trading and owes old trading debts to both B and C.
The corporate structure is as follows:
* A is 100 per cent owned by Fred and Bill.
* B is 100 per cent owned by Fred and Bill.
* C is 100 per cent owned by B.
Replies to Queries 2
Desperately seeking 10 per cent
We act as tax advisers to three associated companies A, B and C. Company A is the only one that is currently trading and owes old trading debts to both B and C.
The corporate structure is as follows:
* A is 100 per cent owned by Fred and Bill.
* B is 100 per cent owned by Fred and Bill.
* C is 100 per cent owned by B.
Both B and C have been dormant for twelve months and we are looking to strike off both under section 652a, Companies Act 1985. The issue is the trading debt owed by A to B (£100,000) and C (£200,000) and how to get these funds to Fred and Bill paying just 10 per cent capital gains tax. Does this sum need to be paid back to B and C, which if repaid could leave company B holding £300,000?
Our concerns are as follows.
* B and C have not traded for one year; does this impact on business asset taper?
* B owns 100 per cent of C are there investment company issues?
* If we move funds from A to C and then to B, will this mean that technically B and C are trading? We would prefer company A to pay the funds directly to Fred and Bill to avoid compromising the dormant status of B and C.
* Could A lose the lower corporation tax band due to being associated with B and C if they lost dormant status through the movement of these funds?
* Will business asset taper relief be at the full rate?
We are hoping for good news.
(Query T16,133) Searcher.
'Searcher' is seeking to maximise the taper relief available to Fred and Bill on gains arising from the disposal of shares in B and C. The relevant shareholdings in A and B are not mentioned but, for simplicity, let us assume that both shareholders own more than 25 per cent each in the two companies. (Lower shareholdings might complicate the position in respect of periods between 6 April 1998 and 5 April 2000.) It is also assumed that companies B and C were classed as trading companies throughout the period from 6 April 1998 and the date they became dormant.
In addition, it should be noted up front that C, being a 100 per cent subsidiary of B, is not directly relevant for taper relief purposes (since any gain on its disposal would be a gain for B), but C's trading status can be relevant in respect of the disposal of shares in B. Subject to this, 'Searcher's' questions are answered (more or less) in the order they are raised all statutory references being to Schedule A1 to the Taxation of Chargeable Gains Act 1992.
With respect to the proposed striking off of companies B and C, their dormant status will be relevant to the taper relief position. If a company is inactive, paragraph 11A provides that periods of inactivity are ignored for taper relief purposes. This is potentially better than a company being treated as non-trading since periods of inactivity do not dilute the taper relief position.
On the assumption that B and C were trading continuously from 6 April 1998 to some date in late 2001, any imminent disposal of B's shares will be treated as a disposal of shares in a trading company where the shares had been held for three and a half years. Under the current rates of taper relief, this means that 75 per cent taper will be available.
The investment by B in C makes no difference to this. For the period in which C was trading, B would have qualified as a holding company of a trading group (under paragraphs 6 and 22). For the past year, when C was dormant, paragraph 11A(4)(c) provides that a company (here B) is not to be treated as active merely by holding shares in an inactive company.
The repayment of loans made by B and C will not on their own compromise their inactive status. Such transactions are not carrying on a business, preparing to carry on a business or winding up such a business and therefore fall outside the definitions of activity in paragraph 11A(2). Further, by extension to the provisions in paragraph 11A(4)(d), which provide that making of loans to associated companies is not sufficient to dislodge a company's inactive status, it is suggested that the receipt of a repayment of such a loan should not have any different effect.
Thus, to answer 'Searcher's' final question, business asset taper relief will be available at the full rate.
Finally, as for the lower corporation tax bands, it is now necessary to refer to section 13, Taxes Act 1988 (or section 13AA if the starting rate for very low profits is relevant). As 'Searcher' recognises, associated companies will affect the thresholds unless they are not carrying on any 'trade or business' at the relevant times (section 13(4)), which applies equally for the starting rate (section 13AA(5)). This test was considered by Mr Justice Park in Jowett (HM Inspector of Taxes) v O'Neill & Brennan Construction Limited [1998] STC 482. There, the judge stated (albeit obiter) that a company 'could exist and have some income without that inevitably meaning that it was carrying on a trade or business' and therefore jeopardise an associated company's tax rates. However, here the repayment of a loan does not even amount to that much being a transaction that is wholly reflected on a company's balance sheet. As a result, the repayment of the loans will not affect A's qualifying for the lower corporation tax rates. Kalonymous.
This needs a full-fledged planning exercise and there is plenty of scope for the transactions to go wrong if the correct paperwork is not maintained. I will answer the questions as they are raised, but 'Searcher' should be aware that there are other issues that might not have been addressed.
* If the companies have not held any investments, there may be a period of inactivity. If there is a period of inactivity, that period is ignored for taper relief. The making of loans to associated companies does not make a company active. However, when C receives the money, it will pay up a dividend and that may make it active. However, the taper relief position that concerns the shareholder is that of company B and not company C. Winding up a business is treated as if the company has no activity.
* The existence of funds in C could make B into an investment company. However, if 'Searcher' can show that there has always been a plan to wind up the companies and the winding up took time, the Inland Revenue should accept that B is not an investment company as it does not exist for making investments but for being wound up.
* Paying the money direct to Fred and Bill means that companies that are owed money do not receive it, but allow a shareholder of a parent company to receive the money. This could mean that the companies are still entitled to receive the money and there is a beneficial loan and a liability under section 419, Taxes Act 1988. If the companies are being struck off and an application made under Extra-statutory Concession C16, it is likely that the Inland Revenue would accept that the money could be paid direct to the shareholders without creating unnecessary paperwork. If that does not work, however, an agreement can be entered into that the loans are distributed as a distribution in specie. That should mean that cash does not enter into these companies, although there will be accounting entries. It will not be possible to pay the loan from C to Fred and Bill, as they are not shareholders in that company. The loan will have to be distributed to B first. I have not considered any stamp duty on transferring the loans or whether the companies are able to make the distribution in specie. 'Searcher' will need to confirm that there are sufficient reserves and that the memorandum and articles of association allow a distribution in specie for interim dividends. Whatever happens, the companies will not be trading even if they are not dormant for accounts purposes.
* A may already have lost the lower corporation tax rates, since B and C will only be ignored if they are not carrying on a business. It is possible that the Inland Revenue could argue that the owning of a debt could be the carrying on of a business even though they are not active enough to be carrying on a trade. That argument should be resisted.
* If it is accepted that the companies have not become investment companies, the period of inactivity is ignored for taper relief. As a result, providing that the companies qualified before, they would qualify for business asset taper relief. It is possible that, when the companies were active, the existence of these loans might have had an impact on taper relief. There is not enough information in the question to answer this point. JWG.
